by Bill O’Grady

This week, we will conclude our series on globalization with a discussion of how China and Russia threaten U.S. hegemony, the potential responses and close with market ramifications.

China, Russia, the U.S. and Hegemony
U.S. policymakers, heeding the Washington Consensus, assumed that developing nations would eventually adopt both market economics and representative democracy.  American policy toward China was thus based on the idea that integrating China’s economy into the world trading system, which was dominated by the U.S., would eventually lead Beijing to drop communism and adopt democracy.  After all, a string of other nations had made similar transformations, including Japan, Germany, South Korea and Taiwan.  Japan and Germany had to lose a mass mobilization war to make this shift, but South Korea and Taiwan eventually shelved authoritarian regimes in favor of democratic governments.

Based on this expectation, the U.S. gave China wide latitude in its trade policy.  Although obviously mercantilist, it was generally believed that China would eventually integrate into the world economic system on U.S. terms as its economy developed.  China has integrated into the world economy but not in a manner preferred by the U.S.

There was a serious flaw in this expectation.  Germany and Japan were willing to adjust to U.S. demands[1] because both nations were dependent on America’s security guarantee.  China, on the other hand, was not necessarily protected by the U.S.  Although Nixon’s opening to China was partly due to China’s worry about Soviet aggression, in reality, China didn’t face any serious outside threats after the collapse of the Soviet Union.  Its military was mostly concerned with internal control.

China is making it clear that it is a strategic competitor to the U.S.  It does not want to necessarily challenge the U.S. around the world but it does not want to be beholden to the whims of American policy.  In his recent work on Thucydides’s Trap,[2] Graham Allison noted that the U.S. threatened British hegemony in the Western Hemisphere in the early 20^th century.  Although the British were uncomfortable not projecting power into that region, American power was overwhelming and the British faced another strategic threat from Germany.  Thus, the British ceded the Western Hemisphere to the U.S.  Part of the reason for taking this step was the cultural similarities between the two countries.  Both were market economies and democracies, which made Britain’s actions more reasonable.  And, Germany was becoming a more proximate threat (and proved to be a real one by 1914).

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[1] Examples include the 1985 Plaza Accord, the 1994 Halifax Accord and Japan’s “voluntary” export restraint on cars in the 1980s.

[2] Allison, G. (2017). Destined for War: Can America and China Escape Thucydides’s Trap? New York, NY: Houghton Mifflin Harcourt Publishing Company.